Thursday, March 19, 2009

In an interesting development in CDS land, holders (and sellers) of Abitibi protection are looking to dealers for determination whether a credit event has occurred at Abitibi, or so debtwire reports. If anyone has followed the story here, last week Abitibi received a stay from acceleration on yet another "peak-of-the-bubble" term loan arranged by the helpful people at Goldman Sachs (batting ratio of about 100% in loan-to-bankruptcies so far). However, the stay was crafted so as not to prevent CDS holders from claiming an event of default has occurred, which would thus allow collections on CDS contracts purchased (much to the displeasure of the original CDS sellers). And as March 20 is CDS roll day and many 1 year contracts expire, there is a lot of money in the balance whether this is a true credit event... It has gotten longs and shorts so scared they have been organizing dealer calls on an almost daily basis to get reassurances they may still have a job next week as both side have likely already booked a profit on the trade... yep, that's the kind of banana republic CDSville can be at times.

The case for longs is that an adjustment of the term loan maturity date constitutes an event of default under the loan agreement. However, no matter what dealers say, a credit event is not a credit event until ISDA chimes in... so this could be a nail biter until the end. In the meantime March 20 2009 expiring CDS are selling for a pretty penny, so there is quite a bit of cash to be made here by contrarian plays.

Curiously, the case at Bowater is even more complicated. As Abi and Bowater, despite their merger, have separate capital structures, an Abitibi default would not cross default Bowater. In fact Bowater creditors are locked in a perverse battle to scuttle the company's ongoing exchange offer and see the company file for chapter 11. Bowater, which is trying to exchange its 9% 2009 notes, has only gotten 54% of tenders, while needing 98%. This target ratio is a pipe dream as among the bond holders is an alleged group of vicious, vindictive CDS holders (ZH exaggerates at times for dramatic effect) who want nothing more than to see the exchange fail and make more money on the CDS leg than on the exchange side, which is already a losing proposition (this is not an exaggeration).

The last example should be a loud warning call to any company that is planning on doing distressed exchange offers yet has a significant amount of net notional CDS outstandings, as the holders will be more than happy to block any consensual efforts only to see the company flounder... This is very likely the dynamic at General Growth Properties, whose future lies in the successful consummation of an exchange offer expiring at 5 pm tomorrow.
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